Mortgage Stress: How Much Has It Risen?

This note was commissioned by the Sunday Star Times (5 August, 2007)

Keywords: Distributional Economics; Macroeconomics & Money; Social Policy;
 In the year to June 2004, 3.7% of all households suffered ‘mortgage stress’ defined as having at least 40% of their disposable income being used to service their mortgage. This definition of mortgage stress is similar to the Australian level after we allow that they use ‘gross income’ (before tax) and we use net income (after tax).

If we use a less demanding standard of 30% of disposable income, the proportion is 7.4%. That is the ratio which was once considered near the upper limit when housing was being bought. Let’s call households between the 30% and 40% as being in mortgage servicing difficulties. In such difficulties (but not in mortgage stress) were also 3.7% of all households.

These figures come from the Household Economic Survey for 2003/4. The results of the next one, for the just finished June 2007 year, are not yet published. However the Reserve Bank reports that ‘House Borrowing Servicing Costs’ have risen from 7.6 percent of all household disposable income in the 2003/4 year to 11.6 percent in the June 2007 quarter.

We can use the RBNZ statistic  to update the Household Economic Survey estimates. It appears that the proportion in mortgage stress (that is outlaying over 40% of their disposable income on mortgage servicing) has risen from 3.7% of all households to 11.2%  in the three year period. Adding those in difficulties (outlaying between 30% and 40%) increases the figureof 7.4% (as already reported) in 2003/4 to 17.0% in the just ended quarter.

So today there are around 175,000 households, involving 315,000 adults and 180,000 children, experiencing mortgage stress. There are another 90,000 households with 165,000 adults and 90,000 children which are having difficulties but have not reached the mortgage stress threshold.

These are large numbers of New Zealanders, but we need to be cautious interpreting them. Some of those in the stress zones will be couples or single adults, who have deliberately taken on a big mortgage as a part of their life plan. Some have invested in rental accommodation. Moreover, almost three quarters of the stressed are parents and their children: some will be under less duress from April of this year when the Working for Families package adds to their income. Some will also be in receipt of housing assistance.

On the other hand, these figures do not include consumer debt which adds to the interest payment outlays, nor do they included those pressured from high rents.

You might also argue that the thresholds of 30% and 40% are arbitrary. Certainly they involve  judgements, but any reasonable alternatives would lead to the same conclusion that there has been a sharp rise of households under financial pressure because of their burgeoning mortgage bills.

The rising proportions of those with mortgage difficulties reflect that as mortgages roll over households have been paying higher interest, while new home purchasers are having to take out larger mortgages as house prices have risen. Interest rates on new mortgages are up from an average of 7.4% p.a. in the 2003/4 year to 9.6% p.a. in the March 2007 quarter. Meanwhile house prices have risen over 40% in the period.

Why have house prices gone up? New Zealand is currently in a speculative housing boom, funded by overseas savings pouring into the economy. This pushes up the price of houses, especially as established households buy additional houses for investment purposes. Meanwhile the Reserve Bank is trying to restrain the house price boom – and the economy as a whole – by raising interest rates, which is the only policy instrument it has.

But relying on interest rates to restrain the economy affects only borrowers, not everyone. Monetary restraint does not share the burden of adjustment across the whole economy, but only on narrow sections – especially recent home buyer (and the export sector as the exchange rate gets pushed up). Because the burden is not shared, those who bear it suffer great pressures as the statistics imply.

But it not just monetary policy. Those who have participated in the housing market for the speculative returns of capital gains have also added to the burden of those who merely want to live in decent housing.

(At least 40% of disposable income used for Mortgage Debt Servicing)

<>  <>Year to June 2004
<>Quarter to June 2007
<>Total Households (No)
<>Percent in Mortgage Stress
<>Households in Mortgage Stress (No)
<>Adults in Mortgage Stress (No)
<>Children in Mortgage Stress (No)
<>People in Mortgage Stress (No)
<>Percent of Household with Mortgages
in Mortgage Stress

(Between 30% and 40% of disposable income used for Mortgage Debt Servicing)

<>  <>Year to June 2004
<>Quarter to June 2007
<>Total Households (No)
<>Percent in Mortgage Servicing Difficulties
<>Households in Mortgage Servicing Difficulties (No)
<>Adults in Mortgage Servicing Difficulties (No)
<>Children in Mortgage Servicing Difficulties (No)
<>People in Mortgage Servicing Difficulties (No)
<>Percent of Household with Mortgages in Mortgage Servicing Difficulties

Note that there are rounding effects.

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